By Alicia Wallace, CNN

Easing inflation and a strong labor market are helping consumers feel better about the economy this month, according to a closely watched survey released Friday by the University of Michigan.

The preliminary consumer sentiment index for February increased to 66.4 from 64.9 in January, the university reported Friday. That’s the best reading since January 2021, when the index read 67.2.

Economists were expecting the headline index to increase slightly to 65, according to consensus estimates on Refinitiv.

Sentiment has been buoyed by the recent cooldown in inflation and continued strong economic data — especially the job market, said Joanna Hsu, director of the university’s Surveys of Consumers, in an interview with Bloomberg TV on Friday. In January, the US economy added 517,000 jobs, and the unemployment rate dipped to 3.4%, the lowest level since May 1969.

“As long as consumers still believe that their incomes are going to remain strong, I think that will continue to lift consumer sentiment and their willingness to spend,” Hsu said.

Consumers are getting more hopeful about US economy – but will that continue?

Still, there’s economic uncertainty

However, the uncertain economic picture has many consumers still concerned about what’s coming.

“Consumers are very much bracing for a downturn, bracing for more unemployment, and so they are going to be continuing to be cautious with their spending,” she noted.

The survey also showed that consumers are expecting inflation to remain high in the near term. One-year inflation expectations increased to 4.2% from 3.9% in January. Gas prices rising in recent weeks likely contributed to that rebound, Hsu said.

Long-run inflation expectations held steady at 2.9% for the third consecutive month.

Inflation expectations are crucial data points for the Federal Reserve. If consumers believe prices will remain high, that could factor in to increased wage demands, which could cause businesses to raise prices.

This story is developing and will be updated.

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